34 yo Canadian semi FIREd...

[Dilettante72]

I'm glad I found this site a couple of weeks ago. Great posts and great people. I had fun with FireCALC and www.flexibleretirementplanner.com, read Bernstein, expecting Bob Clyatt's book anyday.

Status
I've been very lucky in my life and had a great business opportunity when I was really young. The business grew and I got great experience in IT and management over my 16 years (only 6 full time since I was studying too) until it was time for me to leave and sell. I left a year and a half ago and decided to take a break, travelling and doing painting and photography more seriously. This way I would also see how the share sale went (the payment is progressive) and have time to calculate things a bit. If all goes as planned, I'll receive a big part of my payment next week. Deducting the taxes I'll have to pay on this, I should be in the following situation (all in Cdn $)

200k: taxable investment account
140k: deferred tax investment account
400k: cash (to be invested...)
350k: remaining sale balance to be paid over the next two years

My 200k condo is paid off, and as a single guy with no kids and no car (and no plan to get either), my expenses are reasonable at around 35k/y, although I spend an additional ~10k travelling.

The plan
I actually like programming, but I love my current freedom and I'm the kind of guy to always have new projects, things to learn, places to visit, etc..., so I never get bored. I plan on taking some programming contracts and should be able to get some revenues from art sales too. My programming knowledge is quite out of date, actually, but I believe I can learn any technology by myself fairly quickly, so I think I could land a decent job within a 6 months time period if I needed and wanted to. Even with offshoring, I'm confident that very talented developers will continue to be sought after in the future, so I think I'll be able to adapt if my conditions change. In the meantime, I'll invest wisely (good thing I'm not afraid of numbers), I'll stick to 4% withdrawal rate, and won't spend more than 50% of whatever other income I make extra, after taxes.

(Some of) my questions
1) Fees in Canada vs US
Everything seems more expensive in Canada than in the US. It costs me $30/trade (more if > 1000 shares!) using TD Waterhouse, while it's $10/trade on TD Ameritrade. iShare has ETFs in Canada, which have a 0.50% mer instead of 0.35% for the US counter part. Vanguard's 500 US index has a 0.09% mer (100k min), but for non-Americans, their offshore version (same minimum) has fees of 0.38% (that's more than 4 times the price!). TD Bank actually has that index with fees of 0.33%, but maybe slippage is bigger, I don't know. Anyways I can't find better. Actually, broadening my search to all equity funds with low expenses yield only some more TD index funds (0.30% - 0.60%) and Acuity pooled funds (0.10% - 0.25%, 150k min). I never heard of Acuity before (nor of pooled funds in general), and these don't appear to be index funds, so I'm very surprised at the low fees.

a) Any particular reason why all fees are so much higher here?
b) Anybody knows Acuity? What's the catch with these low fees?
c) Am I missing something?

2) Taxes
FireCalc ignores taxes, and the effects of taxes appear to be slim on www.flexibleretirementplanner.com, although I'm not sure how to configure it for taxes here in Canada (well, Quebec actually). I'm not even sure of the differences in taxation and how they impact retirees. I know the question is pretty vague, but anyone has clues here?

Thanks for reading, and comments welcomed!

 

[Martha]

Welcome to the Board!

There are a number of Canadians here so I trust someone will be able to help with the Canada specific questions.

As far as FIREcalc and taxes, I think of taxes as falling uder the category of an expense and do my best to estimate what they might be. Because each person's situation can be so different, and tax rates change over time, at best you are going to have to make an educated guess how much of your retirement income will be used to pay taxes. I have noticed that many people have been pleasantly surprised at how much their taxes have decreased when retired.

The i-orp calculator can help design a withdrawl strategy which incorporates tax concerns. I don't know if it has much relevance for Canadians. http://www.i-orp.com/index.html

 

[donheff]

As far as FIREcalc and taxes, I think of taxes as falling uder the category of an expense and do my best to estimate what they might be.

Take your $37K plus $10K travel, plus a SWAG (simple wild ass guess) of taxes (e.g. $5K). Using that as total expenses (in this example, $52K) figure out where the money would come from (income, cap gains, whatever) and run that against the 2006 Canadian Tax code to get a good idea of what the real taxes would be. Use that figure to relace your tax SWAG and re-calculate until you get it right. Use the fine-tuned expenses to run in Firecalc.

 

[AltaRed]

There have been many threads on the Canadian based Financial Webring Forum located here http://financialwebring.com/forum/ on why Canadian costs/fees are higher. Some of it is due to VAT (i.e. our GST) but mostly, it is because of lack of competition, a cosy relationship between the financial community and consumer apathy in demanding more for less.

I believe there is also a thread on FWF regarding Acuity - use their search engine. But the news about pooled funds is usually not good for the consumer.

You can get lower costs with discount brokers like E*Trade ($10 flat) and now TD Waterhouse is moving to $10 flat end of October with certain minimum account sizes.

I've used FIRECALC to run scenarios. Just need to substitute CPP and RRSP for Social Security and IRAs respectively....and don't forget to add on OAS which is unique to Canada. You can estimate your income tax payments using the tax calculators here http://www.taxtips.ca/calculators.htm#.

 

[Ed_The_Gypsy]

...and consumer apathy in demanding more for less.

Red said it so much nicer than I was going to.

 

[steinj]

Hi D

Suggest you look at investing in US based ETFs to get the lower fees. Acuity pooled funds are good and you can meet the minumums. Their pooled high income fund has a great long term track record if you need income. If you structure your income as dividends, you can earn around $30K in dividends and pay no tax in Canada. JoJo

 

[Canadian FIRE]

Actually a word of caution on using all dividends for income in Canada. To pay no tax they have to be all Canadian companies. Otherwise that nice negative tax rate doesn't apply to your dividend income on taxtips.ca.

I know about this one, since my wife falls into the lowest income bracket she actually generates a tax credit off her dividends that lower her small business income.

Don't you just LOVE all the tax goodies for low income Canadians!

CF

 

[AltaRed]

Very true. Dividend income from US sources does not qualify for the dividend tax credit in Canada. It is taxed same as interest.

And before someone crys foul...and unfair, it really is not unfair. The dividend tax credit for Canadian sourced dividends is recognition that the corporation has already paid corporate income tax to Ottawa and thus the investor is given a 'break' from having that AT income from being fully taxed again. The same is not true for US based dividends....Ottawa hasn't received any tax revenue from US domiciled corporations.

 

[Dilettante72]

Thanks for the different replies....

Take your $37K plus $10K travel, plus a SWAG (simple wild ass guess) of taxes (e.g. $5K).... Use that figure to relace your tax SWAG and re-calculate until you get it right. Use the fine-tuned expenses to run in Firecalc.

Yes, I thought of that. What's still not clear for me is just how much dividends & especially capital gains I have to take into account each year, especially if the markets do really well. I presume that the goal is to not have any extra dividend or capital gain than what is actually needed to live on. Still, as time goes by there should be more capital gains than in the first years where most of any withdrawal (from the taxable account) will not be taxed.

There have been many threads on the Canadian based Financial Webring Forum located here http://financialwebring.com/forum/ on why Canadian costs/fees are higher. Some of it is due to VAT (i.e. our GST) but mostly, it is because of lack of competition, a cosy relationship between the financial community and consumer apathy in demanding more for less.

I believe there is also a thread on FWF regarding Acuity - use their search engine. But the news about pooled funds is usually not good for the consumer.

You can get lower costs with discount brokers like E*Trade ($10 flat) and now TD Waterhouse is moving to $10 flat end of October with certain minimum account sizes.

I've used FIRECALC to run scenarios. Just need to substitute CPP and RRSP for Social Security and IRAs respectively....and don't forget to add on OAS which is unique to Canada. You can estimate your income tax payments using the tax calculators here http://www.taxtips.ca/calculators.htm#.

Great link, provided for two full days of reading and many answers. To avoid much higher fees in Canada, some solutions are: TD e-Funds, Vanguard US ETFs (not yet sure of effects of taxation on dividends and capital gains), iShares.ca (more expensive in part because hedged in Cdn $). Also, doubled checked with TD, it will be 10$ flat per trade after the end of the month for either active traders (>30 trades/quarter) or investors with >500k in assets

Acuity pooled funds don't seem all that bad, but there are additional fees that they and the brokers charge directly to the investor of about 1%. So one should reduce all their performance numbers by 1%.

Thanks, the calculators are great, except maybe that it makes it more clear that I'll be paying more taxes than I would if I lived in other provinces...

Suggest you look at investing in US based ETFs to get the lower fees. Acuity pooled funds are good and you can meet the minumums. Their pooled high income fund has a great long term track record if you need income. If you structure your income as dividends, you can earn around $30K in dividends and pay no tax in Canada.

Thanks JoJo. I will indeed end up buying Vanguard ETFs for US & Intl stuff (after I double check the tax consequences if any).

Actually a word of caution on using all dividends for income in Canada. To pay no tax they have to be all Canadian companies. Otherwise that nice negative tax rate doesn't apply to your dividend income on taxtips.ca...

Thanks, I didn't know it made a difference. Now I have to check if owning an US ETF for the SP500 makes a difference (tax wise) with owning a canadian mutual fund of the same index...

Very true. Dividend income from US sources does not qualify for the dividend tax credit in Canada. It is taxed same as interest.

And before someone crys foul...and unfair, it really is not unfair. The dividend tax credit for Canadian sourced dividends is recognition that the corporation has already paid corporate income tax to Ottawa and thus the investor is given a 'break' from having that AT income from being fully taxed again. The same is not true for US based dividends....Ottawa hasn't received any tax revenue from US domiciled corporations.

I didn't know that. I still wouldn't call that fair... I mean tax treaties exist to avoid double taxation, and since corporations do pay taxes in the US, this is a case of double taxation, no?

 

[Meadbh]

hi 34....looks like you are well set up to succeeed!

Here's a link to a very helpful Canadian tax calculator (it's kept up to date)

http://www.walterharder.ca/MarginalTaxRateCalculator.html

Meadbh

 

[kcowan]

...I didn't know that. I still wouldn't call that fair... I mean tax treaties exist to avoid double taxation, and since corporations do pay taxes in the US, this is a case of double taxation, no?

Canadian tax authorities are concerned about encouraging investment in Cdn public corporations by Canadians and in equalizing tax load between Cap Gains, dividends, and income trusts. Income trusts in RRSPs are the best deal going right now (although they are highly-priced at present).

TD index funds are thought to be a good way to get low overhead US exposure.